The Mystery of Central Planning in Healthcare

Ted Almon — whose huge personal interest in government-run healthcare I’ve highlighted before — had a revealing op-ed in yesterday’s Providence Journal. What’s revealing is his wonderment at the impossibility of the central planning that he supports.

He asks, “Why is reform in general and cost containment in particular so difficult in health care?” And explains, “There appears to be no relation between high and low costs between the [Medicare and private] markets, even in the same community.” Well, knock me over with a gauze pad. All by itself, the fact that the “policy experts who crafted the Affordable Care Act” thought they could redesign America’s healthcare system with Medicare as their reference proves the folly of presuming to give “policy experts” minute control of major industries.

Almon goes on to share the discovery that “trying to manage both [a private competitive marketplace and government-run social programs] within a single system may be impossible, since many of the incentives are in direct conflict.” It’s actually worse than that, because the “strict rate setting and central planning” of the social programs are only feasible if they cover a relatively small part of an industry that can absorb the drain on resources. (This is called “redistribution.”)

The truly revealing part of Almon’s essay, however, comes when he notes that, within this highly (and badly) regulated industry, private companies are consolidating and “scrambling wildly to short up their market power,” which he follows with this through-the-looking-glass paragraph:

In a free-market model, such consolidation works against the interests of consumers, and indeed the data now indicates that private premiums are higher in markets with limited hospital or insurer competition. On the other hand, larger organizations reduce administrative and programmatic duplication and achieve certain economies of scale. Competition among providers is also associated with less care coordination and increased utilization, which even rate setting cannot control.

That “on the other hand” is like the glass on a mirror. From one side, we see an inscrutable contradiction; from the other, everything makes plain sense. The reason competition helps consumers is that it forces providers to innovate in order to offer better products at lower prices to gain market share. Where administration and duplication create relative disadvantages, free-market innovation will involve consolidation or some new service or product that works around it.

However, extra administration isn’t wasteful when it’s supporting organizations that produce a benefit by being distinct. We wouldn’t consolidate the coaching staffs across multiple professional sports teams. And services that appear to be duplicative are also not necessarily wasteful; you’ve got multiple sources of water in your home, but few people would claim that a household would be more efficient if it consolidated its sinks, tubs, hoses, and toilets into one appliance.

When the government forces consolidation, it does free up resources, but those resources had been serving a purpose — probably one that the “policy experts” didn’t see (or didn’t want others to see). If we’re lucky, the system that’s manipulated in this way will only become less effective as the government uses the freed up resources to hand out vote-buying benefits or give special advantage to inside players. Over time, however, it may become inevitable that we get what we’re bound to see in healthcare: namely, a collapse of the system, inverting its purpose from enabling freedom with health to encouraging dependency under threat of suffering.

UPDATE (1/6/16 8:40 p.m.)

Just after posting this, I perused a presentation from the “Working Group for Healthcare Innovation” of which Almon is a part, and I had to laugh. Its first recommendation is to “create an Office of Health Policy to set statewide health policy goals and oversee effective implementation.” Because nothing encourages efficiency more than another bureaucratic office of administrators with no personal stake in the industry.

Sarcasm aside, though, this recommendation is a good illustration of a principle articulated above: The Working Group clearly sees this additional layer of bureaucracy not as wasteful duplication, but as a means of accomplishing some purpose, and their purpose isn’t ensuring that the healthcare industry provides people with the service that they want. Rather, it’s to ensure that healthcare providers do what the government wants (which tends to be for people to be dependent on government so that powerful people can remain powerful and make their allies wealthy).

Assuming you’re Ted Almon: I noted your personal interest in healthcare policy, because it’s absolutely relevant, but the greater part of this post is about your argument. That’s not a personal attack; it’s public discourse, which isn’t all glad-handing and mutual affirmation.